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Reports surfaced this week that Snap (SNAP - Free Report) is developing a platform that will allow users to play games on their popular Snapchat application. Snap will supposedly allow third-party developers to create games for the platform starting this fall. As per the article, one developer is already on board with the initiative.

A Fight for Survival

Snap has been aggressively ramping up its efforts to create original content. In late-April, Snap introduced Snappables, a new feature allowing users to play augmented reality (AR) games on Snapchat. As per the official company announcement, users can “control Snappables using touch, motion, and even facial expressions.” Snap’s deals with developers would thus likely involve utilizing AR technology to create new in-app games.

Snap also recently partnered with NBC News to produce a twice-daily headline news show, as well as a $100 million deal with Time Warner . The company has also formed partnerships with BBC, Vice Media, and a few other large media content producers.

The key rationale behind these moves is centered on the need for the firm to fend off Facebook’s (FB - Free Report) Instagram in order to survive. Instagram, now estimated to be worth as high as $100 billion, now boasts over a billion monthly active users (MAUs) and over 400 million daily active users (DAUs). By comparison, Snapchat sees less than half the DAUs of Facebook, currently sitting at 191 million.

Instagram has launched multiple initiatives of its own, including IGTV, a long-form video feature, as well as a “Stories” product that is very similar to that of Snapchat’s. Stories are short pictures or videos that users can post on their accounts for their friends to see for 24-hours before being automatically deleted.

By the Numbers

As it stands, one of Snap’s biggest weaknesses as a firm is lack of revenue differentiation. Its only major source of revenue is advertising, and investors are concerned about the trend of price per ad impression continuing to decrease. The company created Spectacles, sunglasses that can record videos in 60 frames per second. However, consumer demand has not met the firm’s expectations.

This is where the gaming platform comes into play, as Snap could create a new stream of much-needed revenue through in-app purchases. Orbis Research projects that the AR gaming market will reach $284.93 billion in size by 2023, growing at a CAGR of 152.7%. Should it be able to form partnerships with popular producers, Snapchat could feel a new breath of life.

Snap is coming off a less-than-stellar earnings report in which it reported a loss per share of $0.17, which fell in line with the Zacks Consensus Estimate, and revenues of $230.7 million, which missed our consensus mark of $246.1 million. Revenue numbers represented 54.1% year-over-year growth, which is the lowest growth rate it reported since its IPO in March of last year. Management highlighted the redesign of the application, as well as the pricing of its advertisements and creative tools as key headwinds.

Although the situation may appear rather grim, Snap can utilize its market position to maximize their new initiatives. According to Piper Jaffray’s Taking Stock with Teens survey, 45% of respondents (an average of 16 years old) said that they prefer using Snapchat, compared to 26% for Instagram. Furthermore, as per Pew Research Center’s latest survey, Snapchat was the most-used platform amongst U.S. teens aged 13-17, with 35% of teens admitting to visiting the platform frequently.

A good example of success using in-app purchases can be seen in Tencent’s (TCEHY - Free Report) WeChat. The company highlighted the success of its mini games launch in its Q1 2018 earnings report. It opened the WeChat platform to developers in March, and now boasts over 500 mini games. The firm crushed its earnings reports due largely to mobile game performance, with its mobile business growing 54% year-over-year to reach $2.2 billion in revenue, eclipsing its PC gaming business for the first time.

While Tencent has many tools through which to capitalize on the mobile platform, the report shows us that there is money to be made through mini games and applications. The key question, however, is whether Snap can execute in an effective enough fashion to cash in on these trends as well. Being that the firm’s stock price is down over 46% since its IPO, it will soon approach do-or-die territory.

Outlook

Investors may want to first monitor Snap closely to see if its new initiatives are taking flight, and if it can stay ahead of Instagram. Should the firm begin to bring in more good news, this could be an interesting play down the road. For investors already in the stock, based on current earnings estimate revisions, the firm currently sits at a Zacks Rank #3 (Hold).

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